This is “Review and Practice”, section 2.3 (from appendix 2) from the book Economics Principles (v. 1.0). For details on it (including licensing), click here.

This book is licensed under a Creative Commonsby-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.

This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.

Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.

PDF copies of this book were generated using Prince, a great tool for making PDFs out of HTML and CSS. More details on the process are available in this blog post.

For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (28 MB) or just this chapter (362 KB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).

Draw the aggregate expenditures curve, and find the equilibrium income for this economy in the aggregate expenditures model.

Now suppose the tax rate rises to 25%, so Yd = 0.75Y. Assume that government purchases, investments, and net exports are not affected by the change. Show the new aggregate expenditures curve and the new level of income in the aggregate expenditures model. Relate your answer to the multiplier effect of the tax change.

Compare your result in the aggregate expenditures model to what the aggregate demand–aggregate supply model would show.

Suppose a program of federally funded public-works spending were introduced that was tied to the unemployment rate. Suppose the program were structured so that public-works spending would be $200 billion per year if the economy had an unemployment rate of 5% at the beginning of the fiscal year. Public-works spending would be increased by $20 billion for each percentage point by which the unemployment rate exceeded 5%. It would be reduced by $20 billion for every percentage point by which unemployment fell below 5%. If the unemployment rate were 8%, for example, public-works spending would be $260 billion. How would this program affect the slope of the aggregate expenditures curve?